2017 (4) TMI 1656 - AT - Income Tax

Accrual of income - real income - void OR voidable contract - as argued transaction of income was reversed by the assessee as there was no legally enforceable right to such income under a void contract - as per CIT(A) since the assessee had performed their part of contract as agreed between the parties there was no justification to hold that no lawful income had arisen to the assessee on the ground of non-est contract - HELD THAT - The contracts entered without obtaining the consent of the Board are to be termed as voidable at the option of the Board in the case of the Companies having share capital below 1 crore but there is no corresponding or analogous provision in the Companies Act for a similar situation in case of Companies having share capital above Rs. 1 crore. AR produced before us by way of Paper Book a copy of extract of Section 297 of the Companies Act 1956 from A. Ramaya Guide to the Companies Act 2006 Edition and Relevant extracts of Indian Contracts Act 1972 which clearly stated that in the absence of approval of Central Government where necessary the contract shall be void. Nothing contrary to this is produced before us and this statement supplements the observations of the Ld. CIT (A) to the effect that want of consent in respect of the Companies with share capital below Rs. 1 crore is voidable at the option of the Board whereas it would render the contract void ab initio in case of Companies share capital more than Rs. 1 crore. In this case the assessee alleges that on the contract becoming void ab initio the transaction of income from ICICI Home Financing Co. Ltd. was reversed by the assessee since there was no legally enforceable right to such income on the contract being declared as void ab initio. On this aspect there is no denial of fact by the Revenue. Thus no real income had accrued to the assessee under a void contract as such the addition made on the basis of the income under a void contract and that too which was reversed subsequently is unsustainable. Decided in favour of assessee.

Summary

The appeal in this case concerns the addition of income by the Assessing Officer (AO) to the assessee's account, which was subsequently reversed by the assessee due to a contract being declared void ab initio. The key issues presented and considered in this judgment are as follows:1. Whether the income added by the AO based on a void contract should be sustained.2. Interpretation of Section 297 of the Companies Act regarding void contracts.3. Determination of tax liability based on real income rather than book entries.The detailed analysis of the issues is as follows:The Court analyzed the provisions of Section 297 of the Companies Act, which state that contracts entered into without the consent of the Board of Directors may be voidable at the option of the Board. However, there is no provision for contracts with companies having share capital above a certain threshold. The Court also considered the argument that tax liability should be based on real income rather than book entries.The Court's interpretation and reasoning focused on the observation by the Ld. CIT (A) that contracts entered without obtaining the consent of the Board are voidable at the option of the Board for companies with share capital below a certain threshold. However, there is no similar provision for companies with share capital above that threshold. The Court also noted that the assessee had reversed the income transaction from the void contract, indicating that no real income had accrued to the assessee. Therefore, the addition made by the AO based on the income from the void contract was deemed unsustainable.Key evidence and findings included the contract between the assessee and ICICI Home Finance Co. Ltd., the letter declaring the contract void ab initio, and the reversal of the income transaction by the assessee.The Court applied the law to the facts by determining that no real income had accrued to the assessee under the void contract. The treatment of competing arguments involved the assessee's contention that the contract was void ab initio and therefore no tax liability should arise from it, while the Revenue relied on the orders of the authorities below.The significant holdings of the judgment include the following core principles established:1. Contracts entered without the consent of the Board may be voidable at the option of the Board for certain companies.2. Tax liability should be based on real income rather than book entries.The final determination on each issue was that the appeal of the assessee was allowed, and the AO was directed to delete the impugned addition.In conclusion, the Court held that the addition of income based on a void contract was unsustainable, and tax liability should be determined based on real income rather than book entries. The judgment provides clarity on the treatment of void contracts under the Companies Act and the principles governing tax liability in such cases.